Charles (00:00):
Burr sounds like a shortcut to wealth, but for many it becomes a shortcut to financial stress. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re diving into the disadvantages of the Burr investing method. The parts no one talks about, but every investor needs to hear. And this strategy may seem straightforward on paper, but a few pitfalls on weight investors who don’t examine the strategy closely enough. So let’s get started. So over the past decade, the Burr real estate investing strategy has gained widespread popularity and Burr stands for buy, rehab, rent, refinance, and repeat, while offers investors the ability to grow real estate portfolio quickly than just saving up and buying rentals. It comes with some of disadvantages and risks that most gurus who tout the investment method fail to mention. So Burr is a five step real estate investing strategy that allows investors to recycle their original investment into future property to wanna execute it correctly.
Charles (00:49):
Investors buy an undervalued property with debt, typically hard money, renovate it, rent it out, refinance it with longer term debt, extracting their initial investment, and then repeat the process with another property. So some of the drawbacks of the burn investment strategy that I see include, number one, investors need to purchase a deeply undervalued property. Slightly discounted properties or properties require minor renovations, might not create enough value for a total cash out refinance. And this goes exact opposite of what I suggest new investors do, which is buy a lightly value add property or a property needing a little bit of work so that you can easily get it back online. You don’t have to go anything, any like project management or huge contractor renovations, anything like this, and then save these heavy, these deeply undervalued properties for several deals down the road. When you have a team, when you have some handymen, you know some contractors that are really good and you can actually get accurate estimating from what you know already in the business.
Charles (01:42):
Number two is a large initial cash investment. Traditional real estate investing, the buyer must make a sizable upfront investment. This is unlike house hacking. We’re gonna invest or can purchase with a minimal down payment. Number three is the short term initial mortgage. Here’s where the real risk starts. You know, with deeply discounted property as the only financing solution is typically private money or hard money, and there’s a reason why it’s called hard money. These loans have double digit rates, hefty upfront fees, points upfront, shortterm in sizeable penalties. You know, if you need an extension, there’s a penalty for that. And these loan programs are not for the faint heart. You really have to know what you’re doing to get one of these loans. Number four is renovation budgets. Project management overruns accurately estimating a construction or renovation project is very difficult even for experienced investors.
Charles (02:27):
That’s why you have experienced investors. They’re always having reserve funds and you just don’t know everything until you start rehabbing a property. You can protect against this by patting the contractor’s bids, which you should do. And having a S sizeable reserve fund, which I just talked about, which you should also have, but there are always unknowns. Additionally, a successful burrs, they require constant project oversight by the investor, which can be a sizable time commitment. It’s doubtful on your first burr that you’re gonna be able to have like an A project manager, you’re gonna be able to pay to do this. And number five is renting once the property’s complete and the investor must now rent the property for monthly mortgage amount or they’ll be coming out of pocket every month to cover the mortgage. Furthermore, let’s not forget about the property management and the repair costs for maintaining the property.
Charles (03:08):
Number six is market risks and refinancing complexities. The most unknown in this whole strategy comes during their refinance. Since investors are unaware of what to expect if the market shifts during your renovations or financing standards change or interest rates change. Like say you bought a property to do this strategy in February of 2022 and then it was ready for September, 2022. A lot of financing just changed during that and your numbers probably don’t work anymore. Moreover, you must pay off your first mortgage usually within a year since some refinancing lenders have a seizing period, usually three to 12 months before refinancing. So it means that you need to, and that refinancing starts when that tenant goes in there. So it means you usually with hard money, you have one year and they have no prepaying penalty ’cause they want their money back as fast as possible.
Charles (03:51):
So you go through this period, you renovate, it takes you three months, let’s just say, and then you’ve gotta get it all set. You gotta rent it out. So maybe like you’re six months in, then you’ve gotta like season it. That’s what your lender’s requiring. I mean, you’re getting really close now you gotta refinance it too. So now you’re getting really close to that one year before you have to go back to your hard money lender and ask for some sort of extension. And it doesn’t give you much time for mistakes or delays. And if appraised value falls short, the investor may need to come out of pocket to refinance or receive less of its initial capital back at closing. Additionally, for the Burr method to work, in most situations, it is implied that the investor over leverages their property when they refinance it to extract every dollar from the property.
Charles (04:30):
Now, you might say most banks and lenders, they won’t refinance over 70, 80, 80 5% true, but you’re still pushing it to the max leverage on that. So that means that maybe it’s not a hundred percent leverage. I mean, the thing though is that for you to get out, you have to get every penny out from that lender, and this does not provide any buffer for the investor. Hopefully the investor will come away with most of their initial capital back, but they now have an over leveraged property that probably only minimally cash flows since it’s leveraged to the max. And when property management and repairs are factored in, this could come outta the investor’s pocket. And if you wanna learn more about avoiding over leveraging, you can check out episode SS 180 5. That’s SS 180 5. So the Burr investment strategy can work great for experienced investors with deep knowledge of their market, estimating, renovation, project management, and property management.
Charles (05:16):
Stiller can put many inexperienced investors over their heads pretty quickly, especially with cost over runs in market pullbacks. So I hope you enjoyed. Please remember rate reviews, subscribe, some many comments on potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.
